Don’t Believe The Hype – The Lemonade Story

“By now, I wonder how, Some people never know”Don’t Believe The Hype – Public Enemy

I am a sucker for new stuff. I bet many of you are as well. If news of the release date of the iPhone 7 caused you to immediately organize your camping gear for a week long sidewalk holiday at your local Apple store, then you know what I am talking about. Beyond our excitement for the next iPhone or Tesla, apparently we also get all giddy for new insurance as well.

Recently a new insurer named Lemonade has popped up on the scene and has caused quite a ripple. Here are some recent news headlines:

So, to start, this article is NOT a criticism of Lemonade or what they are trying to bring to the consumer. Insurance is in desperate need of heart and soul. No, what this article will do is splash some cold water on the hype inferno that appears to have taken over the sane minds of our industry. So allow me to go point by point with my criticisms:

Is Lemonade really Peer-to-Peer Insurance?

Peer-to-Peer Insurance – Whether it’s called Peer-to-Peer or fashionably referred to as P2P, Lemonade ain’t either of those things. Lemonade is a standard insurance company. You pay premiums, and they pay claims from the general pool of funds. There are no peer groups insuring one another. There is no distribution model of peer invitations or referrals. There is none of that. The only “peer” element of the business model is that you will, as a customer, be grouped with others like you for the sole purposes of dispersing any underwriting profits to a charity of the group’s choosing. Now, there is a reason for this that I will attempt to get into later on, but, seriously, was anything I just described even remotely connotative of Peer-to-Peer? Want to know what Peer-to-Peer looks like, see Friendsurance or Guervara.

Is Lemonade really InsurTech?

Sure, Lemonade is an online only firm. And yes, you can buy their insurance products through an app on your phone in which a bot named Maya will help you with your coverage selections, but it’s still just an insurance company with a fancy website. I can buy insurance from other insurance companies where I can choose from dealing with their website, walking into an agent’s office or calling them over the phone. They’ve eliminated 2 options from me, and given me a sole option that is little different from what I could have had before. And before you start screaming, “but I don’t want to call anyone or drive to any office” just keep in mind that having options makes the experience better. Insurance is complicated enough that occasionally I would like to call someone or walk into an office and scream my head off. I deserve that option!

What about the bot and the machine language, isn’t that technology? It is technology in the sense that there are computer scientists engineering a robot to replace a human. But if the experience is crummier than just dealing with a human, then it is a wasted effort. But, in an attempt to play fair, I will reverse my position on this one, if it can be shown that the robot can handle the firestorm that comes when the company is hit with their first major natural catastrophe.

But isn’t it awesome that Lemonade’s underwriting profits go to charity?

One of the big marketing ideas coming from Lemonade is a unique feature of aligning the interests of policyholders and the insurer by taking excess profits and donating them to charity in the name of the peer group discussed above. Fraud is a big deal in insurance and most insurers have systems in place to detect and counteract fraud. The charity angle from Lemonade is an attempt to prevent fraud from happening by linking the monetary loss due to fraud, not to the big-bad insurer, but to a softer, more sympathetic victim. Fundamentally, if you are a Lemonade policyholder and your claim is fraudulent is any way, you are depriving some charity of much needed funds.

It is an interesting concept, but my issue with it is that I don’t believe it will have much of a financial punch. The first drawback is that property insurance, being a natural catastrophe (CAT) exposed business, is subjected to infrequent but occasionally massive losses. What appears to be underwriting profits in the quiet years between CATs are really opportunities to strengthen your balance sheet for the inevitable hit. As Lemonade expands to other states, their inability to build surplus because of the charity and their corporate status (see below), will really hamper their business model. They are now and will fully be, reliant on reinsurance to back their entire program. That by itself is not terrible, but with full reliance on reinsurers, the excessive profits that they think will make themselve availed of, in reality, just go to the reinsurer. Think about this, if the reinsurer is taking all the risk, why would Berkshire Hathaway or Lloyds of London (2 of the reinsuring entities for Lemonade) not wish to profit from the transaction? These excess underwriting profits will simply transfer from insurer to reinsurer. My prediction is that the charitable donations will, in most years, be nonexistent or minuscule in comparison to premiums paid.

My second issue with the charity angle, is that I don’t think it will bring the alignment of interest that Lemonade believes it will.One reason is that, if I am correct about the excess profits not materializing, then just the intermittent scheduling of charitable givings makes the whole exercise uninteresting to the insured, in my opinion. If Lemonade can’t provide a significant charitable donation in most years, the alignment will lose its appeal simple because the policyholders won’t be able to hang their hats on it, so to speak. But perhaps worse, the charity angle may lose effectiveness because Lemonade is also marketing that they pay claims “super fast”. Super fast claims handling (which on their website, they tout as a check in minutes), invites fraud. I think there is a major conflict of the business model. If your marketing message is that you can get a claims check in a few minutes without having an adjuster or claims rep work the claim, then your message is music to those who in which the charitable message will have no impact. An an insurance buyer and seller I know that out of super low prices, super fast claims handling and excess profits to charities, I can only choose one of those angles. More than one seems difficult. Getting all three strikes me as impossible.

A broker by any other name…

Lemonade is a broker by another name. Another of Lemonade’s selling points is that insurers have a conflict of interest in that they make money by denying claims. Lemonade, purports to have absolved themselves of this conflict by not actively acting like an insurer. Here’s how:

Lemonade is actually two companies. It is a risk-bearing insurance company AND a brokerage firm. When you buy a policy from Lemonade, the 20% fee goes immediately to the brokerage firm. The remaining 80% stays with the insurer. The paper on which the insurer is based is a B-corporation, which essentially makes it a non-profit. So it is the brokerage part of the business that is the money maker. That is the entity that secured all that seed-funding. Sequoia Capital knows a thing or two about making sound investments. They don’t do non-profits. And once the fee from the premiums that the policyholder pays gets swept into the Lemonade’s brokerage company, it will not be used to pay claims, at all…ever. It is income, free of insurance risk. If the insuring entity ever goes insolvent, all the fees will be protected.

And there is nothing wrong with this. It is a model that has been used successfully already by other insurers. But, by acting as a broker, Lemonade has shifted its risk from the risk of loss or damage of the client towards that of a trusted advisor who only has one product to sell and gets a 20% commission for selling that one product. What if, their product is NOT the best choice for the client? Will Maya the bot steer the buyer elsewhere like a traditional agent would? No. How forceful will Maya point out all the flaws and gaps of Lemonade’s ISO style homeowners policy? Will Maya give direction to the insured about the flood or earthquake policy they really should have, but can’t buy through Lemonade? Somehow I can’t match the hype and excitement of the internet of seeing a broker selling an average product, even if it’s sold via a robot.

Lastly, I want to challenge the major premise of Lemonade, that insurers make money by denying claims. As a professional in the business for 20 years, this is the one selling point that Lemonade and it’s marketing keeps touting that upsets me the most. It upsets me because it isn’t true. In fact, I have seen the opposite. I have seen emails or communications from senior executives to staff adjusters onsite during a natural disaster that flat out instructed their adjusters to move quickly, be fair and if there is any doubt about the damage, settle IN FAVOR of the policyholder. I am not naive enough to believe that insurers never play fast or loose with their claims handling but by and large, insurers pay their claims. In the property area in which Lemonade competes, those policies they sell are legal contracts. Many a court battle has been fought to word the contract so that claims can be settled quickly and fairly. Lemonade is implying that they will be different, they are almost implying that they won’t deny claims. Are there really claims that insurers have denied (and acknowledged via the court system) that Lemonade would not have? I seriously doubt it.

Look, I like new things, you like new things. Lemonade is the new thing on the 300-year old block. But the shiny new aspects that Lemonade are bringing to the table don’t appear to be worthy of the hype in my opinion. I give them an A for effort in maximizing the hype to drive attention and sales. But insurance is all about the long game. The real KPIs are retention, combined ratios and customer satisfaction. Those will take years to sort out. Are they truly in it for the customer, do they really want to revolutionize the business model or is the exit strategy already in place. The world is watching. I hope they succeed.

Nick Lamparelli is a 20+ year veteran of the insurance wars. He has a unique vantage point on the insurance industry. From selling home & auto insurance, helping companies with commercial insurance, to being an underwriter with an excess & surplus lines wholesaler to catastrophe modeling Nick has wide experience in the industry. Over past 10 years, Nick has been focused on the insurance analytics of natural catastrophes and big data. Nick serves as our Chief Evangelist.

31 thoughts on “Don’t Believe The Hype – The Lemonade Story”

Hi Nick, I’ve been following Lemonade closely since before they launched with a mix of both curiosity and suspicion. I’ve also posted many a comment elsewhere taking them to task for statements they’ve made which don’t add up, are naive, or are derisive of our existing profession.

However, I wanted to add that your piece is one of the best I’ve read so far which sums up why Lemonade rubs so many the wrong way. (For all their tech age hipsterism, they are motivated by the old-fashioned, almighty dollar like anyone else.) Really nice work here.

Thank you for saying that insurers make money from denying a claim. It upsets me the most also. I work in the industry as well and it just isn’t true. Denied claims still cost the company money. They still have to pay the adjusters and end up losing money. Every time I see this ad it drives me insane.

“just keep in mind that having options [visiting agent in person or on the phone] makes the experience better.”

My issue with this statement is having these options is not the cost-free bonus that is presented in this piece. Having brick and mortar stores costs a significant amount of money. If I’m a digital-only customer, I’m having to subsidize those costs despite never using them. It also disadvantages people in rural areas who can’t easily get to a branch. The phone is the similar, just with a lower overhead cost than the physical branches. This is why banks have started charging money for paper statements to be mailed. If an insurer wanted to charge extra to people visiting/calling their insurer, I’d be happy as a digital-only customer since I wasn’t having to subsidize their older-fashioned (IMO) way of operating.

Obviously, while we still have generations of Americans that were not digital natives, having brick and mortar stores can still be an easy choice to make. But millennials and younger generations are increasingly looking for more digital-centric options, especially if they can pass along savings by getting rid of physical branches. Millennials are also more interested in B-Corporations, so another plus for Lemonade.

If Lemonade rarely sends money to charities as you predict, I could see this PR being looked back on as hype, but if it delivers – I think will be an exciting change in the field.

Research the company before getting policy. They have horrible claim process and doesn’t pay out in 3 minutes. Not even 4 weeks. They will say ooh we will pay you in 24 hours then 3 weeks later so we need more information and we need to inspect property. I already replaced everything. Thanks any way fake insurance

Hi Jeremy, I too am experiencing issues. These could be catastrophic for me well beyond just this claim, so I am hoping for some information. After my first conversation with Lemonade, they passed me off to another company who handled everything from there “on their behalf”. Nothing about this has been AT ALL congruent with their advertising and the bulk of their press. Did you experience anything like this?

Great article!
The marketing of Lemonade is really phantastic (this is not ironic). They are used as a ‘role model’ from many people in their presentations. But: if Lemonade acts like the combination of a direct writer (direct insurer) and a broker with a commission of 20 % from the premium, they won’t have any cost advantage compared to their competitors – like GEICO or Liberty Mutual direct business for instance. This will also become obvious to the customers in the long run … let’s see the premium level in a few years and the renewal (retention) rate. In Germany, you simply can’t be a broker, if you offer only products from one insurer, if you don’t do any maket comparisons, and if you don’t carry out a sound need analysis. Kind regards, Jochem Schueltke

I will say, you ask if Maya the chatbot will point you towards the earthquake insurance you should have but they don’t offer and the answer is yes – “she” was actually very helpful at letting me know that my plan doesn’t cover earthquake insurance and pointed me in the direction of another policy I could purchase. That’s not to say your points aren’t valid, just wanted to answer one of your questions about it.

I also like that signing up is easy. Have you recently tried to sign up for StateFarm, All State, and other large providers? Once they have your physical address, they will bombard you with direct mail.

Not to mention that one of lemonade’s primary advantage is the simplicity. Every major provider has incredibly awful websites with incredibly awful, smothered-in-legalese terms and FAQs that nobody understands.

I get it. It looks great. I will even use them to buy my daughter’s renters insurance. But don’t kid yourself, there is still a lot of hype here. They are tiny and predominantly playing in the renters insurance space even though they want to play in the homeowners market. They aren’t really disrupting anything, yet. Technology looks great, insurance acumen looks so-so. They will survive as an insurance company, I think, but they already have competitors that have comparable products (see Hippo Insurance) so I think they will end up becoming a competitive player who has financial statistics not too different from the industry averages.

No one has really looked into that and Lemonade themselves are mum about it. My guess is that with all of the effort required to be an insurer, they likely just used an off-the-shelf fraud model and plugged it in. That’s a complete guess. It’s hard to believe they have the resources to handle all of the back-office insurance stuff and to build all of the technology for the UX that they would also have the bandwidth to build a fraud model from scratch.

They use words like machine learning and artificial intelligence to generate hype and attract all the excess capital floating around in the early stage space. They don’t have any data off of which to do any learning. If they did they wouldn’t be doing ISO type stuff. The big companies are the ones with the data and the abilty to apply “machine learning” or “artificial intelligence” or big data solutions to that data. Of course those companies likely just refer to it as analyzing the data.

I think they have the excitement of an Instagram account and very pretty marketing. Time will tell with the substance, as you noted. The interesting thing (and opportunity) to me is that they are shining a light on how starved the market is for fresh ideas and pretty marketing — and quite honestly, lifestyle. I think people want their services to match their lives. Just seeing this article after Lemonade’s gun control announcement today. I hear you on all these points, and we’ll all be watching to see how this plays out.

Nick, I have to say I really enjoyed this artical. Thank you for writing it. I found it very helpful and informative. I just found out about Lemonade and googled for reviews. Yours popped up and I am so glad it did.
I hope you don’t mind a question. I do not know much about insurance but I do have renters with State Farm. The policy is $30,000 with $1 or 2 thousand dollar deductible (I don’t remember which). When I was checking and googling about different insurance companies, it seemed that everything was saying for renters, State Farm is the best. I pay $29 a month auto pay. Should I stay where I am or go with some other type of policy with some other company?
Thanks so much
Clark Mc

I was with State Farm in Atlanta and Baltimore and paid $10 a month and it covered only me (no roommates, whether they were a significant other pro not). I’ve never heard of $30/month with $1k deductible. That seems absurdly high, especially with a high deductible. I pay $6/month for both my fiancé and me on Lemonade. (We pay another $80/year for earthquake insurance but we live in San Francisco so it seems worth it.) My bike was stolen recently and the mobile claim process was very easy, and my claim was approved in minutes.

I can see the attraction to Lemonade, I got it for my daughter in college. I would never buy it for myself because: 1. I have some assets I need to protect that are important to my family, 2. I get discounts for bundling disparate coverages such as auto and 3. I am lazy and I don’t want to manage my insurance personally, so I prefer to work with agents who can do most of the managing for me.

As far a the price Clark pays, it seems Clark has replacement value much higher than a traditional tenants policy which explains the higher cost.

Thanks for replying. I can’t make a recommendation without having some serious regulator action come upon me, but let me do a pro/con between SF and Lemonade.

For State Farm:
Pro – A+ rating, giant balance sheet. Super highly likely they will pay their claim in a natural disaster. They have a full suite of products so a customer would have no issues acquiring coverage for most things, most everywhere in the US. You can get bundling discounts with auto coverage. Because of their size, they have the capital base to be one of the lower cost providers and have generally been known to be that. They can write business below cost and still be profitable: https://www.insurancejournal.com/news/national/2017/03/01/443224.htm .

Con – Traditional insurer. Agent based. Claims can take some time to resolve. Digital interfacing is pretty lacking.

Lemonade
Pro – digital interfacing is modern. The use of bots allows simple transactions to be done in seconds. super cheap rates (that is a con as well see below). Extremely socially conscious.

Con – no rating. Tiny balance sheet. As they move in states with natural catastrophes, this will become an issue. Super cheap rates, which will put pressure on their balance sheet. This will be a short term phenomenon. Their rates will need to rise in the future. Another con is their self-righteousness. This will be a pro for some but every time I read an article from them I think of this video: https://www.youtube.com/watch?v=TMTkedIUX8U

I personally have a travelers renters/auto policy for the discounts. My daughter is a college student in California and I bought her a Lemonade policy.

Nick,
Lemonade claims traditional insurance carriers make money by denying claims. Only a guppy could swallow that swill. Has Lemonade never heard of Insurance Bad Faith and a weaponized internet? Insurance carriers get crushed in courtrooms every day because they screw up claim settlements. Angry, ill-informed consumers find dark pleasure using the anonymity of the internet to disparage any perceived slight. There is no incentive to deliberately cheat consumers on insurance claims. Plus, insurance companies are made up of real people not Randolph and Mortimer Duke. Those real people want to go home at night without ulcers and a guilty conscience. Nothing would make them happier than to pay claimants everything they want. But what claimants want and what they’re contractually owed have to align.

In my years of experience I have never seen an insurance carrier deliberately cheat a consumer. On the other hand, I’ve witnessed far too many consumers lie on their applications and their claims.

My instincts tell me the founders of Lemonade, while well-meaning, are incredibly naive. Most consumers are motivated by self interest. (See Ferengi.) They may sign up with Lemonade because it feels good. When that fork in the road presents itself, though, cognitive dissonance will send them down the road of self interest.

When their books are bleeding red because their socially conscience customers become personally irresponsible the Lemonade kids will want to take a listen to The Who’s 1971 classic, “Won’t Get Fooled Again.”

Just the idea that you could have a business model based on people wanting to ‘do the right thing’ is a heartening and worth while experiment. I’m all for it. But thanks for the clarification – transparency is all to the good!

In answer to your statement:
“Lastly, I want to challenge the major premise of Lemonade, that insurers make money by denying claims. As a professional in the business for 20 years, this is the one selling point that Lemonade and it’s marketing keeps touting that upsets me the most. It upsets me because it isn’t true. In fact, I have seen the opposite. I have seen emails or communications from senior executives to staff adjusters onsite during a natural disaster that flat out instructed their adjusters to move quickly, be fair and if there is any doubt about the damage, settle IN FAVOR of the policyholder.”

Well in my experience of health insurance (same business model, yeah?) whether from the desire to keep money as long as possible, or sheer incompetence or just old, unscalable bureaucracy, submitting claims is a pain in the ass – if you’re lucky. Talk about ripe for disruption…

You said:
“My instincts tell me the founders of Lemonade, while well-meaning, are incredibly naive. Most consumers are motivated by self interest. (See Ferengi.) They may sign up with Lemonade because it feels good. When that fork in the road presents itself, though, cognitive dissonance will send them down the road of self interest.”

My instinct tells me that the above is obvious. So obvious that a bunch of intelligent entrepreneurs must have some idea of it. It’s easy for those who live in a particular paradigm to see any deviation from it’s principles as ‘naive’. But I don’t think it’s the cautious cynics who disrupt industries. The point is to try to close the gap between self interest and good business in creative ways. Also, I’m a great believer in the idea that if you assume the worst, you’ll perpetuate it.

Has anyone done an analysis of their rates? My (uneducated) guess is that their “algorithms” err strongly on the side of caution and that their rates are only competitive in areas with relatively low risk of natural disaster exposure. They might throttle that down after a few years of success, but their marketing is fairly dependent on being able to show large charity payouts.

They are taking a beating on their loss ratios right now. I have yet to meet a single person yet that thinks you can profitably write $5,000 in contents and $50,000 in liability for a renters policy for $65. (especially when they are skimming $13 off the top as their own commission). They would need 96 policies to cover a single $5,000 claim.

Thank you Nick! Your article brings objectivity for customers and investors, to whom Lemonade’s communications are being targeted.

Beyond Lemonade, there is an unfulfilled need and expectation in the market for more transparency, easier to understand products and hassle-free quoting-issuance-service-claims process that Lemonade and other (new or existing) players are trying to address.